Can Gulf states ever find a way to cooperate over oil production?

The New Arab
Can Gulf states ever find a way to cooperate over oil production?

When two states hold leases over a shared oil and gas field, opting to manage the resource jointly makes clear economic and technical common sense both for the companies and countries involved. Acting independently, however, is far from the most efficient or reliable way to derive maximum benefit from a field in terms of cost-effective operating expenditures. 

The New Arab reports in its article Can Gulf states ever find a way to cooperate over oil production? that "unitisation" - the joint extraction of resources from an oil field which extends across two or more licence or contract territories - may also form a concrete part of economic diplomacy, by creating a long-term business venture between two countries which can sometimes open a path to peace. Unfortunately, as things stand, Gulf and Middle East states have not favoured such a practical philosophy.

An oil and gas reservoir is a geological zone lying thousands of metres beneath the ground, consisting of porous rock capped by an impenetrable layer. These reservoirs may reach across hundreds of square kilometers and be buried under hundreds of metres of rock. Developing such reservoirs requires an understanding of the field as an entire entity. Where there may have been a fierce fight between competitors to be granted a lease, this must make way for cooperation between countries and companies in the exploitation of a shared discovery. Unitisation has not been a common approach in the Gulf, or the wider Middle-East, due to a lack of mutual trust and the many deep-seated rivalries between often jingoistic countries. 

The Arash/Dora offshore gas field, for example, owned by Saudi Arabia, Kuwait and Iran was discovered in 1967, but in spite of the huge gas needs of the first two countries, exploitation has yet to begin. The North Dome/South Pars offshore gas field, owned by Qatar (2/3) and Iran (1/3), is the world's largest gas field by far. Production started in 1988 and again in 2002, with very limited cooperation, if any, and enormous losses on both sides due to the lack of a shared development and production strategy. The South Azadegan and Yadavaran are joint oil fields shared between Iraq and Iran. After decades of no communication, exploitation of the vast resource is finally beginning, possibly towards the first unitisation between Iran and Iraq, and a policy of economic diplomacy.

Between the UAE and Iran

Abu Al-Bukoosh (ABK) is the Abu Dhabi portion of the Iranian Salman offshore field and a typical example of a non-unitised joint field with two separate oil production operations, and offloading facilities on either side of the Iran/Abu Dhabi border in the middle of the Gulf, only a mile from each other. In November 1986, during the Iran-Iraq war, ABK was struck by an Iraqi air attack, causing heavy damage and casualties. This was greeted with much surprise as Abu Dhabi was supporting Iraq in the war, and ABK was operated by a French company, Total ABK. After an immediate and heartfelt apology from Baghdad, a second air attack struck Salman, causing far more serious casualties and damage than the first strike on ABK. The two parts of the joint field were shut down. After a few months, ABK re-started production, but Iranian aircraft soon struck ABK, delivering a clear message not to produce before they could restart on their side as well. A unitised ABK/Salman field would clearly have avoided Iraqi Air Command forces seeing it as a target during the war.

A missed opportunity for Iran

The sacrosanct principle that the National Iranian Oil Company (NIOC) is the only company authorised to produce oil and gas in Iran was established by Mohammed Mossadegh in the early 1950s. This worked quite well during the Shah's time, largely thanks to the efficiency of the Oil Service Company of Iran (OSCO) which helped NIOC to produce 6.1 million barrels per day in 1978, compared with 3.7 Mb/d today.

After the establishment of the Islamic Republic of Iran and the Iran-Iraq war, the first attempt to break Iranian isolation did not come until 1995. This was thanks to the introduction of buy-back contracts which had previously never allowed international oil companies to participate in the production management of the developed fields. Iran, which enjoys the world's largest gas reserves, is a surprisingly modest exporter of gas, making relatively few sales per pipeline. The potential for liquefied natural gas (LNG) plants was also investigated, and the first contracts were signed from 2004, with Persian LNG (operated by Shell) and Pars LNG (operated by Total). Mossadegh's principle didn't concern them, as it was not a question of production, rather one of the transformation and sale of NIOC-produced gas into LNG to be sold on the international market. These contracts simply established a consortium, based on international standard practices, with a foreseen duration of several decades. 

However, during the first mandate of President Mahmoud Ahmadinejad, all these efforts were repeatedly delayed. Iran completely missed the 2004–2009 window of opportunity for big LNG plants, and sanctions closed down any further discussion. This window will remain firmly closed for a decade or more, because of the glut of LNG on the market created by the commissioning of projects by the US, Russia and Australia. It is also very likely that, with the long-term presence in Iran of so many international oil companies - Total, Ente Nazionale Idrocarburi, Shell, Petronas, Österreichische Mineralölverwaltung, Oil and Natural Gas Corporation and China National Petroleum Corporation - in buy-backs and/or other standard businesses such as LNG, international sanctions should have been lighter, if present at all.

Qatar: The LNG solution

Qatar's consisteny policy has been to protect its sovereignty, which is not easy given it is surrounded by bigger Sunni brother-countries. In this respect, despite the fact that Qatar holds huge gas reserves, and has neighbours with huge gas demands, there is only one gas pipeline - "Dolphin" - to the UAE and Oman. In contrast with Iran's strategy, Qatar preferred the LNG solution over pipelines, as it does not bind the seller and buyer by a long-term physical link. This is the price of sovereignty.

At the beginning of June, President Trump rehashed the idea of Iran as the "Great Satan" of terrorism; a rather rich statement given he was speaking from Riyadh. However, this, it could be said, triggered Riyadh and Abu Dhabi's list of dangerous and ilogical demands on Qatar. It is important to remember that: Oman, Iraq and Kuwait are not supporters of the Gulf Cooperation Council's stance, thus the US Secretary of State, Rex Tillerson, had to promptly come and play the role of firefighter in the spat between Saudi Arabia and Qatar. The biggest US air base outside the US is Al-Udeid in Qatar, key to United States Air Forces (USAF) and Royal Air Forces (RAF) strikes against the Islamic State group. The biggest Turkish armed forces deployment is in Qatar, and President Erdogan has declared that Saudi-UAE demands were a crime against Islam.

Exxon is largely involved in Qatargas, as is Total, which also operates Al-Shaheen, the biggest Qatari oilfield. Shell, meanwhile, operates Pearl, the world's biggest gas to liquid unit. It is also noteworthy that within two weeks of the Saudi-UAE announcement, the CEOs of these three companies had paid a visit to the ruler of Qatar to reassure him. In addition, most maritime logistical problems were quickly and deftly solved by trans-shipment in some regional ports, such as Salalah in Oman.

Economic diplomacy

Unitisation of joint fields is one of the most logical and cost-effective ways of shoring-up economic diplomacy in an unstable region. The start of discussions between Iran and Iraq on the possible unitisation of joint fields show that progress on this front is possible. Given Qatar's relatively friendly relations with Iran relations, it could be sensible to revive past techniques here, such as the agreement signed by Qatar and Iran in 1990 for the joint development of the North Dome/South Pars gas field. Both countries, working together towards the joint management of their shared resource, will be more efficient and make significant savings, while consolidating their their position as world leaders in the gas market. Last, but certainly not least, this could be a swift way for Iran to gain a foothold in the LNG market.